Review of Gravity Model Derivations

Abstract

The gravity model of international trade flows is a common approach to modeling bilateral trade flows. But it is criticized on the ground of weak theoretical base and poor micro-foundation. The gravity equation for describing trade flows first appeared in the empirical literature without much serious attempt to justify it theoretically. The theoretical support for the gravity model was originally very poor, but after the second half of the 1970s, several theoretical developments have filled this gap .In this study we also endeavor to justify the Gravity model specification and derive gravity equation from different perspective. We infer from literature and find it a strong empirical tool of analysis for international trade flows even though of some weakness it innate. Moreover, multilateral trade resistance factors may be added in the empirical estimation to correctly estimate theoretical gravity model.

Keywords: Gravity Model, Anderson Gravity Model, Tinbergen Gravity Model, Newton’s Basics